Skip to main content
Modelling and simulation

Modelling and simulation

Statistical physics challenges economics

12 Feb 1999

Economists like to think that stock markets are rational, but recent research has shown that irrational behaviour has a significant effect on the market. Thomas Lux of the University of Bonn in Germany and Michele Marchesi of the University of Cagliari in Italy have created a computer model of a financial market that splits traders into two groups,'fundamentalists' and 'noise traders'. The former make decisions based on realistic predictions of the 'real world' value of companies. Noise traders, on the other hand, act on trends and patterns in the market. The model, which is based on ideas from statistical physics, shows that large numbers of'optimistic' and 'pessimistic' noise traders destabilizes the market. The model can also explain the extremely high value of Internet stocks (Nature 397 498).

Once the balance between ‘fundamentalists’ and noise traders is breached the market beco

You’ve reached the limit of what you can view on Physics World without registering

If you already have an account on Physics World, then please sign in to continue reading

If you do not yet have an account, please register so you can

  • Access more than 20 years of online content
  • Choose which e-mail newsletters you would like to receive
Copyright © 2024 by IOP Publishing Ltd and individual contributors